1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
Commission file number 1-8491
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HECLA MINING COMPANY
- ----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 82-0126240
- -------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6500 Mineral Drive, Suite 200
Coeur d'Alene, Idaho 83815-8788
- -------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
208-769-4100
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for at least
the past 90 days. Yes XX . No .
---- ----
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Class Outstanding October 31, 2002
- ------------------------- ----------------------------
Common stock, par value 86,080,238 shares
$0.25 per share
2
Hecla Mining Company and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 2002
I N D E X*
Page
PART I. - Financial Information
Item l - Consolidated Balance Sheets - September 30,
2002 and December 31, 2001
- Consolidated Statements of Operations and
Comprehensive Income (Loss) - Three Months and
Nine Months Ended September 30, 2002 and 2001
- Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 2002 and 2001
- Notes to Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosure About
Market Risk
Item 4 - Controls and Procedures
PART II. - Other Information
Item 1 - Legal Proceedings
Item 6 - Exhibits and Reports on Form 8-K
*Items omitted are not applicable.
3
Part I - Financial Information
Hecla Mining Company and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(In thousands, except share data)
September 30, December 31,
2002 2001
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 17,795 $ 7,560
Accounts and notes receivable 10,354 6,648
Inventories 14,024 10,868
Other current assets 1,754 1,426
Net assets of discontinued operations 375 2,714
---------- ----------
Total current assets 44,302 29,216
Investments 98 69
Restricted investments 6,378 6,375
Properties, plants and equipment, net 91,168 104,593
Other noncurrent assets 13,037 12,863
---------- ----------
Total assets $ 154,983 $ 153,116
========== ==========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 7,354 $ 7,938
Accrued payroll and related benefits 7,008 7,832
Current portion of long-term debt 6,416 7,043
Accrued taxes 928 787
Accrued reclamation and closure costs 6,911 6,026
---------- ----------
Total current liabilities 28,617 29,626
Deferred income taxes 300 300
Long-term debt 7,376 11,948
Accrued reclamation and closure costs 43,764 46,455
Other noncurrent liabilities 7,082 6,823
---------- ----------
Total liabilities 87,139 95,152
---------- ----------
SHAREHOLDERS' EQUITY
Preferred stock, $0.25 par value, authorized 5,000,000 shares;
issued 2002 - 753,402 shares and 2001 - 2,300,000 shares;
liquidation preference 2002 - $43,608 and 2001 - $127,075 188 575
Common stock, $0.25 par value, authorized 200,000,000 shares;
issued 2002 - 86,088,512 shares and 2001 - 73,068,796 shares 21,522 18,267
Capital surplus 403,823 404,354
Accumulated deficit (357,409) (364,183)
Accumulated other comprehensive income (loss) (24) 173
Less stock held by grantor trust; 2002 - 40,860 common shares
and 2001 - 102,114 common shares (132) (330)
Less stock held as unearned compensation; 2002 - 19,036 common shares
and 2001 - 19,035 common shares (6) (6)
Less treasury stock, at cost; 2002- 8,274 common shares and
2001 - 62,116 common shares (118) (886)
---------- ----------
Total shareholders' equity 67,844 57,964
---------- ----------
Total liabilities and shareholders' equity $ 154,983 $ 153,116
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
(Dollars and shares in thousands, except for per-share amounts)
Three Months Ended Nine Months Ended
-------------------------------------- ---------------------------------------
September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001
------------------ ------------------ ------------------ ------------------
Continuing Operations:
Sales of products $ 27,790 $ 22,501 $ 79,836 $ 63,479
---------- ---------- ---------- ----------
Cost of sales and other direct production costs 15,482 17,064 44,248 45,067
Depreciation, depletion and amortization 5,894 5,167 17,583 14,932
---------- ---------- ---------- ----------
21,376 22,231 61,831 59,999
---------- ---------- ---------- ----------
Gross profit 6,414 270 18,005 3,480
---------- ---------- ---------- ----------
Other operating expenses:
General and administrative 1,493 1,654 5,137 4,976
Exploration 1,257 455 2,987 1,749
Depreciation and amortization 22 67 90 203
Provision for closed operations and
environmental matters 510 232 768 1,223
---------- ---------- ---------- ----------
3,282 2,408 8,982 8,151
---------- ---------- ---------- ----------
Income (loss) from operations 3,132 (2,138) 9,023 (4,671)
---------- ---------- ---------- ----------
Other income (expense):
Interest and other income 367 1,425 1,461 2,525
Miscellaneous expense (933) (662) (842) (1,510)
Interest expense (437) (662) (1,374) (3,279)
---------- ---------- ---------- ----------
(1,003) 101 (755) (2,264)
---------- ---------- ---------- ----------
Income (loss) from continuing operations, before
income taxes 2,129 (2,037) 8,268 (6,935)
Income tax provision (56) - - (168) - -
---------- ---------- ---------- ----------
Income (loss) from continuing operations 2,073 (2,037) 8,100 (6,935)
Discontinued operations:
Loss, net of income tax (540) (352) (1,326) (192)
Gain (loss) on disposal, net of income tax - - (67) - - 12,651
---------- ---------- ---------- ----------
Net income (loss) 1,533 (2,456) 6,774 5,524
Preferred stock dividends (18,568) (2,013) (22,593) (6,038)
---------- ---------- ---------- ----------
Loss applicable to common shareholders (17,035) (4,469) (15,819) (514)
---------- ---------- ---------- ----------
Other comprehensive income (loss), net of income tax:
Cumulative effect of a change in accounting principle - - - - - - (136)
Change in derivative contracts - - (38) (256) (38)
Reclassification adjustment of loss included in
net income (loss) 10 10 30 29
Unrealized holding gains (losses) on securities (26) (41) 29 (31)
Change in foreign currency items - - - - - - 4,898
---------- ---------- ---------- ----------
Other comprehensive income (loss) (16) (69) (197) 4,722
---------- ---------- ---------- ----------
Comprehensive income (loss) applicable to
common shareholders $ (17,051) $ (4,538) $ (16,016) $ 4,208
========== ========== ========== ==========
Basic and diluted income (loss) per common share:
Loss from continuing operations after
preferred stock dividends $ (0.19) $ (0.06) $ (0.18) $ (0.19)
Income (loss) from discontinued operations,
including gain (loss) on disposal (0.01) - - (0.02) 0.18
---------- ---------- ---------- ----------
Basic and diluted loss per common share $ (0.20) $ (0.06) $ (0.20) $ (0.01)
========== ========== ========== ==========
Weighted average number of common shares
outstanding 86,031 70,946 78,294 68,194
========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
5
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine Months Ended
---------------------------------------
September 30, 2002 September 30, 2001
------------------ ------------------
Operating activities:
Net income $ 6,774 $ 5,524
Noncash elements included in net income:
Depreciation, depletion and amortization 17,673 15,135
Gain on sale of discontinued operations - - (12,651)
Gain on disposition of properties, plants and equipment (299) (327)
Provision for reclamation and closure costs 1,445 766
Change in net assets of discontinued operations 884 1,283
Change in assets and liabilities:
Accounts and notes receivable (3,706) (84)
Inventories (3,156) (194)
Other current and noncurrent assets (594) (1,628)
Accounts payable and accrued expenses (584) 1,794
Accrued payroll and related benefits (385) 818
Accrued taxes 141 313
Accrued reclamation and closure costs and other
noncurrent liabilities (3,546) (5,317)
--------- ---------
Net cash provided by operating activities 14,647 5,432
--------- ---------
Investing activities:
Proceeds from sale of discontinued operations 1,585 59,761
Additions to properties, plants and equipment (9,095) (15,934)
Proceeds from disposition of properties, plants and equipment 5,705 464
Increase in restricted investments (3) (106)
Purchase of investments and change in cash
surrender value of life insurance, net - - 406
Other, net (40) (8)
--------- ---------
Net cash provided (used) by investing activities (1,848) 44,583
--------- ---------
Financing activities:
Common stock issued for warrants and under stock
and stock option plans 2,635 428
Common stock issuance, net of offering costs - - 5,462
Borrowings on long-term debt 3,317 12,309
Repayments on long-term debt (8,516) (61,781)
--------- ---------
Net cash used by financing activities (2,564) (43,582)
--------- ---------
Net increase in cash and cash equivalents 10,235 6,433
Cash and cash equivalents at beginning of period 7,560 1,373
--------- ---------
Cash and cash equivalents at end of period $ 17,795 $ 7,806
========= =========
The accompanying notes are an integral part of the consolidated financial statements.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Basis of Preparation of Financial Statements
In the opinion of management, the accompanying unaudited
consolidated balance sheets, consolidated statements of
operations and consolidated statements of cash flows contain all
adjustments, consisting only of normal recurring accruals,
necessary to present fairly, in all material respects, the
financial position of Hecla Mining Company (the "Company" or
"Hecla"). These unaudited interim consolidated financial
statements should be read in conjunction with the Company's
audited consolidated financial statements and related footnotes
as set forth in the Company's annual report filed on Form 10-K
for the year ended December 31, 2001.
Note 2. Discontinued Operations
During 2000, in furtherance of Hecla's determination to
focus its operations on gold and silver mining and to raise cash
to retire debt and provide working capital, Hecla's board of
directors made the decision to sell the industrial minerals
segment. On March 5, 2002, Hecla completed the sale of its pet
operations of the Colorado Aggregate Division (CAC) of MWCA for
$1.6 million in cash. The sale of the CAC pet division did not
result in a gain or loss. Hecla continues to pursue a sale of
the remaining assets of the industrial minerals segment, although
there can be no assurance that a sales transaction will be
completed. At September 30, 2002, the remaining net assets of
CAC are approximately $0.4 million. Hecla recorded a loss from
discontinued operations of approximately $0.5 million in the
third quarter of 2002, or $0.01 per common share, compared to a
loss of $0.4 million in the same period in 2001. Hecla recorded
a loss from discontinued operations of approximately $1.3 million
in the first nine months of 2002, or $0.02 per common share,
compared to income of approximately $12.5 million, or $0.18 per
common share, in the same period in 2001 due to a $13.0 million
gain on the sale of the Kentucky-Tennessee Clay Company, K-T
Feldspar Corporation, K-T Clay de Mexico and certain other minor
inactive industrial minerals companies (collectively the K-T
Group) in March 2001.
Note 3. Income Taxes
Hecla's income tax provision for the first nine months of
2002 and 2001 varies from the amount that would have been
provided by applying the statutory rate to the income before
income taxes primarily due to the availability of net operating
losses that can be utilized in Mexico and in Venezuela. For the
three months and nine months ended September 30, 2002, Hecla
recognized a $56,000 and $168,000, respectively, provision for
foreign income taxes.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Note 4. Inventories
Inventories consist of the following (in thousands):
September 30, December 31,
2002 2001
------------- ------------
Concentrates, bullion, metals
in transit and other products $ 6,202 $ 4,211
Materials and supplies 7,822 6,657
-------- --------
$ 14,024 $ 10,868
======== ========
At September 30, 2002, Hecla had forward sales commitments
through December 31, 2004, for 123,786 ounces of gold at an
average price of $288.25 per ounce. Hecla intends to physically
deliver metals in accordance with the terms of the forward sales
contracts. As such, Hecla has elected to designate the contracts
as normal sales in accordance with SFAS 138 and as a result,
these contracts are not required to be accounted for as
derivatives under SFAS 133. Hecla is exposed to certain losses,
generally the amount by which the contract price exceeds the spot
price of a commodity, in the event of nonperformance by the
counter parties to these agreements. The London Final gold price
at September 30, 2002 was $323.70 per ounce.
Note 5. Contingencies
Bunker Hill Superfund Site
In 1994, the Company, as a potentially responsible party
under the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980 (CERCLA), entered into a consent decree
with the Environmental Protection Agency (EPA) and the State of
Idaho, concerning environmental remediation obligations at the
Bunker Hill Superfund site located in Kellogg, Idaho. The 1994
Consent Decree ("1994 Decree") settled Hecla's response-cost
liability under CERCLA at the Bunker Hill 21-square mile site.
In August 2000, Sunshine Mining and Refining Company, which was
also a party to the 1994 Decree, filed for Chapter 11 bankruptcy
and in January 2001, the Federal District Court approved a new
Consent Decree between Sunshine, the U.S. Government and the
Coeur d'Alene Indian Tribe which settled Sunshine's environmental
liabilities in the Coeur d'Alene Basin lawsuits described below
and released Sunshine from further obligations under the 1994
Decree. In response to a request by Hecla and ASARCO
Incorporated, the United States Federal District Court in Idaho,
having jurisdiction over the 1994 Decree,
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
issued an Order in September 2001 that the 1994 Decree should be
modified in light of a significant change in factual
circumstances not reasonably anticipated by the mining companies
at the time they signed the 1994 Decree. In its Order, the Court
reserved the final ruling on the appropriate modification to the
1994 Decree until after the issuance of the Record of Decision on
the Basin-Wide Remedial Investigation/Feasibility Study. The EPA
issued the Record of Decision ("ROD") on the Basin in September
2002, proposing a $359 million Basin clean-up plan to be
implemented over 30 years. The ROD also establishes a review
process at the end of the 30-year period to determine if further
remediation would be appropriate. Based on the 2001 Order issued
by the Court, Hecla intends to seek relief from the work program
under the 1994 Decree within the Bunker Hill site. In addition,
the Company and ASARCO have negotiated a reduced 2002 work
program with the EPA and the State of Idaho pending the outcome
of the dispute resolution over the 1994 Decree. As of September
30, 2002, the Company has estimated and accrued a liability for
remedial activity costs at the Bunker Hill site of $8.9 million.
These estimated expenditures are anticipated to be made over the
next three to five years. Although the Company believes the
accrual is adequate based upon its current estimates of aggregate
costs, it is reasonably possible that the estimate of Hecla's
obligations may change in the near or long term.
Coeur d'Alene River Basin Environmental Claims
- Coeur d'Alene Indian Tribe Claims
In July 1991, the Coeur d'Alene Indian Tribe brought a
lawsuit, under CERCLA, in Idaho Federal District Court against
Hecla and a number of other mining companies asserting claims for
damages to natural resources downstream from the Bunker Hill site
over which the Tribe alleges some ownership or control. The
Tribe's natural resource damage litigation has been consolidated
with the United States' litigation described below.
- U.S. Government Claims
In March 1996, the United States filed a lawsuit in Idaho
Federal District Court againstcertain mining companies that
conducted historic mining operations in the Silver Valley of
northern Idaho, including Hecla. The lawsuit asserts claims under
CERCLA and the Clean Water Act and seeks recovery for alleged
damages to or loss of natural resources located in the
Coeur d'Alene River Basin in northern Idaho for which the United
States asserts to be the trustee under CERCLA. The lawsuit
asserts that the defendants' historic mining activity resulted in
releases of hazardous substances and damaged natural resources
within the Basin. The suit also seeks declaratory relief that
the Company and
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
other defendants are jointly and severally liable for response
costs under CERCLA for historic mining impacts in the Basin
outside the Bunker Hill site. Hecla has asserted a number of
defenses to the United States' claims.
In May 1998, the EPA announced that it had commenced a
Remedial Investigation/Feasibility Study under CERCLA for the
entire Basin, including Lake Coeur d'Alene, in support of its
response cost claims asserted in its March 1996 lawsuit. In
October 2001, the EPA issued its proposed clean-up plan for the
Basin. The EPA issued the Record of Decision on the Basin in
September 2002, proposing a $359 million Basin cleanup plan to be
implemented over 30 years. The ROD also establishes a review
process at the end of the 30-year period to determine if further
remediation would be appropriate.
The first phase of the trial commenced on the consolidated
Coeur d'Alene Indian Tribe's and the Federal District Court cases
on January 22, 2001, and was concluded on July 30, 2001. In the
first phase of the trial, the Court has been asked to determine
the extent of liability, if any, of the defendants for the
plaintiffs' CERCLA claims. The Court has also been asked to
determine the liability of the United States for its historic
involvement in the Basin. No decision on the issues before the
Court in the first phase of the litigation has been issued. If
liability is determined in the first phase, a second trial is
anticipated to be scheduled during 2003 to address damages and
remedy selection. Two of the defendant mining companies, Coeur
d'Alene Mines Corporation and Sunshine Mining and Refining
Company, settled their liabilities under the litigation during
the first quarter of 2001. Hecla and ASARCO are the only
defendants remaining in the litigation.
During 2000 and into 2001, Hecla was involved in settlement
negotiations with representatives of the U.S. Government and the
Coeur d'Alene Indian Tribe. The Company also participated with
certain of the other defendants in the litigation in a State of
Idaho led settlement effort. On August 16, 2001, the Company
entered into an Agreement in Principle with the United States and
the State of Idaho to settle the governments' claims for natural
resource damages and clean-up costs related to the historic
mining practices in the Coeur d'Alene Basin in northern Idaho.
Since August 2001, the Company and EPA have continued to
negotiate a final consent decree based upon the terms set forth
in the Agreement in Principle. Due to a number of changes that
have occurred since the signing of the Agreement in Principle,
including improvements in the environmental conditions at Grouse
Creek and lower estimated clean-up costs in the Coeur d'Alene
Basin as well as the Company's improved financial condition, the
terms of the multiple properties settlement approach set forth in
the Agreement in Principle appear no longer favorable to the
Company. Therefore,
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
the United States, the State of Idaho and the Company have agreed
to discontinue utilizing the Agreement in Principle as a
settlement vehicle. However, Hecla anticipates further
settlement negotiations with the United States and the State of
Idaho to limit its environmental clean-up liabilities for
historic mining practices in the Coeur d'Alene Basin. Due to a
number of uncertainties related to this matter, including the
outcome of pending litigation and the result of any settlement
negotiations, the Company does not have the ability to estimate
what, if any, liability exists related to the Coeur d'Alene River
Basin at this time. It is reasonably possible the Company's
ability to estimate what, if any, obligation relating to the
Coeur d'Alene Basin may change in the near or long term depending
on a number of factors. In addition, an adverse ruling against
the Company for liability and damages in this matter could have a
material adverse effect on Hecla.
Private Class Action Litigation
On or about January 7, 2002, a class action complaint was
filed in this matter in the Idaho District Court, County of
Kootenai, against several corporate defendants, including the
Company. The Company was served with the Complaint on January
29, 2002. The Complaint seeks certification of three plaintiff
classes of Coeur d'Alene Basin residents and current and former
property owners to pursue three types of relief: various medical
monitoring programs, a real property remediation and restoration
programs, and damages for diminution in property value, plus
other damages and costs. The Company believes the Complaint is
subject to challenge on a number of bases and intends to
vigorously defend itself in this litigation. On April 23, 2002,
the Company filed a motion with the Court to dismiss the claims
for relief relating to the medical monitoring programs and the
remediation and restoration programs. At a hearing before the
Idaho District Court on the Company's and other defendants'
motions held October 16, 2002, the Judge struck the complaint
filed by the plaintiffs in January 2002 and instructed the
plaintiffs they have 60 days to re-file the complaint limiting
the relief requested by the plaintiffs to wholly private damages
they may have incurred from their claims of trespass and
nuisance. The Court dismissed the medical monitoring claim as a
separate cause of action and stated that any requested remedy
that encroached upon the EPA's clean up in the Silver Valley
would be precluded by the pending Federal Court case.
Insurance Coverage Litigation
In 1991, Hecla initiated litigation in the Idaho District
Court, County of Kootenai, against a number of insurance
companies that provided comprehensive general liability insurance
coverage to the Company and its predecessors. Hecla believes the
insurance
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
companies have a duty to defend and indemnify Hecla under their
policies of insurance for all liabilities and claims asserted
against Hecla by the EPA and the Tribe under CERCLA related to
the Bunker Hill site and the Basin in northern Idaho. In 1992,
the Idaho State District Court ruled that the primary insurance
companies had a duty to defend Hecla in the Tribe's lawsuit.
During 1995 and 1996, Hecla entered into settlement agreements
with a number of the insurance carriers named in the litigation.
Hecla has received a total of approximately $7.2 million under
the terms of the settlement agreements. Thirty percent of these
settlements were paid to the EPA to reimburse the U.S. Government
for past costs under the Bunker Hill site Consent Decree.
Litigation is still pending against one insurer with trial
suspended until the underlying environmental claims against Hecla
are resolved or settled. The remaining insurer in the
litigation, along with a second insurer not named in the
litigation, is providing Hecla with a partial defense in all
Basin environmental litigation. As of September 30, 2002, Hecla
had not reduced its accrual for reclamation and closure costs to
reflect the receipt of any potential insurance proceeds.
Other Claims
In 1997, Hecla's then subsidiary, Kentucky-Tennessee Clay
Company (K-T Clay), terminated shipments (comprising
approximately 1% of annual ball clay production) sold to animal
feed producers, when the Food and Drug Administration determined
trace elements of dioxin were present in poultry. Dioxin is
inherently present in ball clays generally. On September 22,
1999, Riceland Foods (the primary purchaser of ball clay from K-T
Clay used in animal feed) commenced litigation against K-T Clay
in State Court in Arkansas to recover its losses and its
insurance company's payments to downstream users of its animal
feed. The complaint alleged negligence, strict liability and
breach of implied warranties and seeks damages in excess of $7.0
million. Legal counsel retained by the insurance company for K-T
Clay had the case removed to Federal District Court in Arkansas.
In July 2000, a second complaint was filed against K-T Clay and
Hecla in State Court in Arkansas by Townsends, Inc., another
purchaser of animal feed containing ball clay sold by K-T Clay.
A third complaint was filed in the Federal District Court in
Arkansas on August 31, 2000, by Archer Daniels Midland Company, a
successor in interest to Quincy Soybean Company, a third
purchaser of ball clay sold by K-T Clay and used in the animal
feed industry. The Townsends' and Archer Daniels' lawsuits
allege damages totaling approximately $300,000 and $1.4 million,
respectively. These complaints contain similar allegations to
the Riceland Foods' case and legal counsel retained by the
insurance carrier is defending K-T Clay and Hecla in these
lawsuits. The Company believes that these claims comprise
substantially all the potential claims related to this matter.
In January 2001, Hecla
12
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
was dismissed from the only lawsuit in which it had been named as
a defendant. In March 2001, prior to trial, K-T Clay settled the
Riceland Foods' litigation against K-T Clay through a settlement
payment substantially funded by K-T Clay's insurance carrier. K-T
Clay contributed $230,000 toward the Riceland Foods'
settlement. In August 2001, the Federal District Court dismissed
the Archer Daniels' litigation; however, a similar lawsuit based
upon implied warranty was refiled by Archer Daniels against K-T
Clay on October 24, 2001, in Arkansas Federal Court. The defense
of the Townsends' lawsuit is being covered by insurance. The
Company believes that K-T Clay's insurance coverage is available
to cover the remaining claims. On March 27, 2001, Hecla sold its
interest in K-T Clay. However, Hecla agreed to indemnify the
purchaser of K-T Clay from all liability resulting from these
dioxin claims and litigation to the extent not covered by
insurance. In July 2002, K-T Clay, through its insurance
carrier, negotiated settlements of both remaining lawsuits. The
settlement payments will be funded 100% by K-T Clay's insurance
carrier. Based on the settlement agreements, the respective
courts dismissed both lawsuits.
On November 17, 2000, the Company entered into an agreement
with Zemex U.S. Corporation guaranteed by its parent, Zemex
Corporation of Toronto, Canada, to sell the stock of K-T Clay and
K-T Mexico, which included the ball clay and kaolin operations,
for a price of $68.0 million. On January 18, 2001, the Company
brought suit in the United States District Court for the Northern
District of Illinois, Eastern Division against the
parent, Zemex Corporation, under its guarantee for its
subsidiary's failure to close on the purchase and meet its
obligations under the November 2000 agreement. Discovery has
been completed and the Court has set the trial to commence in
late January 2003. At September 30, 2002, the Company has not
recorded any potential gain from the settlement of this
litigation and has recorded the associated costs to expense as
incurred.
In March 2002, Independence Lead Mines Company
("Independence"), the holder of a net 18.52% interest in the Gold
Hunter or DIA unitized area of the Lucky Friday mine, notified
Hecla of certain alleged defaults by Hecla under the 1968 Lease
Agreement between the unit owners (Independence and Hecla under
the terms of the 1968 DIA Unitization Agreement) as lessors and
defaults by Hecla as lessee and operator of the properties.
Hecla is a net 81.48% interest holder under these Agreements.
Independence alleges that Hecla violated the "prudent operator
obligations" implied under the lease by undertaking the Gold
Hunter project and violated certain other provisions of the
Agreement with respect to milling equipment and calculating net
profits and losses. Under the Lease Agreement, Hecla has the
exclusive right to manage, control and operate the DIA
properties, and its decisions with respect to the character of
work are final. On June 17, 2002, Independence filed a lawsuit
in Idaho State District Court seeking termination of the Lease
Agreement and requesting unspecified damages. Hecla believes
that it has fully complied
13
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
with all obligations of the 1968 Lease Agreement and will be able
to successfully defend its right to continue to operate the
property under the Lease Agreement.
In Mexico, a claim has been made, in one court, as to the
validity of the ownership of the Velardena mill and, in another
court, the validity of a lien that predates acquisition of the
mill by Hecla's subsidiary. Recent decisions rendered by these
courts have upheld the validity of the mill sale to Hecla's
subsidiary and upheld validity of the lien as to Hecla's
subsidiary as purchaser. Hecla's subsidiary is evaluating whether
to proceed with other legal action to preclude enforcement of the
lien. Although the Company believes it holds good title to the
mill, there is no assurance that Hecla will prevail in this
litigation. In addition, IIG Capital, LLC, the lender to the
project loan used to acquire the mill, agreed to indemnify Hecla
for all obligations or losses relating to these liens or claims.
However, losing the litigation could result in an interruption of
production or even the loss of the mill.
The Company is subject to other legal proceedings and claims
not disclosed above which have arisen in the ordinary course of
business and have not been finally adjudicated. Although there
can be no assurance as to the ultimate disposition of these other
matters, it is the opinion of management that the outcome of
these other matters will not have a material adverse effect on
Hecla's financial condition.
Note 6. Long-Term Debt and Credit Agreements
As of September 30, 2002, Hecla's wholly owned subsidiary
Hecla Resources Investments Limited (HRIL), had $5.0 million
outstanding under a credit agreement used to provide project
financing at the La Camorra mine. The project financing
agreement is repayable in semiannual payments ending December 31,
2004, and had an interest rate of 4.9% at September 30, 2002.
HRIL must maintain compliance with certain financial and
other restrictive covenants related to the available ore reserves
and performance of the La Camorra mine. The Company is required
to maintain hedged gold positions sufficient to cover all dollar
loans, operating expenditures, taxes, royalties and similar fees
projected for the project. At September 30, 2002, there were
123,786 ounces of gold sold forward. The forward sales agreement
assumes the ounces of gold committed to forward sales at the end
of each quarter can be leased at a rate of 1.5% for each
following quarter. The Company maintains a Gold Lease Rate Swap
at a fixed rate of 1.5% on the outstanding notional volume of the
flat forward sale, with settlement being made quarterly with the
Company receiving the fixed rate and paying the current floating
gold lease rate.
14
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
As of September 30, 2002, the Company has a $3.0 million
outstanding subordinated loan due in three equal semiannual
payments commencing in June of 2003. The loan agreement gives
the Company the option to capitalize interest payments by adding
them to the principal amount of the loan. At September 30, 2002,
the interest amount added to principal was approximately $0.6
million. The interest rate on the subordinated debt was 5.86% as
of September 30, 2002.
At September 30, 2002, Hecla's wholly owned subsidiary,
Minera Hecla, S.A. de C.V. (Minera Hecla), had $5.8 million
outstanding under a project loan used to acquire a processing
mill at Velardena, Mexico, to process ore mined from the San
Sebastian mine near Durango, Mexico. Under the terms of the
credit facility, Minera Hecla will make monthly payments for
principal and interest over 63 months. The loan bears interest
at the rate of 13%.
On March 27, 2002, Hecla entered into a $7.5 million
revolving bank agreement due in March of 2004. Amounts under the
bank agreement are available for general corporate purposes and
are collateralized by Hecla's interest in the Greens Creek Joint
Venture. At September 30, 2002, there was no amount outstanding
under the revolving agreement.
On April 8, 2002, Hecla completed a sales transaction for
its headquarters building, terminating a $3.0 million revolving
bank agreement collateralized by the building. For additional
information relating to the sale of the headquarters building,
see Note 9 of Notes to Consolidated Financial Statements.
Note 7. Income (Loss) per Common Share
The following table presents a reconciliation of the
numerators and denominators used in the basic and diluted income
(loss) per common share computations. Also shown is the effect
that has been given to cumulative preferred dividends in arriving
at the loss applicable to common shareholders for the three
months and nine months ended September 30, 2002 and 2001, in
computing basic and diluted loss per common share (dollars and
shares in thousands, except per-share amounts). A non-cash
dividend of approximately $17.6 million was included in the 2002
amounts related to the completed preferred stock exchange
offering. For additional information relating to the exchange
offering, see Note 10 of Notes to Consolidated Financial
Statements.
15
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Three Months Ended Nine Months Ended
---------------------- ----------------------
September 30, September 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Income (loss) before preferred stock dividends $ 1,533 $ (2,456) $ 6,774 $ 5,524
Less: Preferred stock dividends (18,568) (2,013) (22,593) (6,038)
--------- --------- --------- ---------
Basic loss applicable to common shareholders $ (17,035) $ (4,469) $ (15,819) $ (514)
Effect of dilutive securities - - - - - - - -
--------- --------- --------- ---------
Diluted loss applicable to common shareholders $ (17,035) $ (4,469) $ (15,819) $ (514)
Basic and dilutive weighted average shares 86,031 70,946 78,294 68,194
--------- --------- --------- ---------
Basic and diluted loss per common share $ (0.20) $ (0.06) $ (0.20) $ (0.01)
========= ========= ========= =========
These calculations of diluted losses per share for the three
months and nine months ended September 30, 2002 and 2001 exclude
the effects of convertible preferred stock ($37.7 million in 2002
and $115.0 million in 2001), as well as common stock issuable
upon the exercise of various stock options and warrants, as their
conversion and exercise would be antidilutive, as follows:
Three and Nine Months
Ended
---------------------------
September 30,
2002 2001
----------- -----------
Stock Options 2,817,335 2,329,000
Warrants 2,000,000 1,506,998
Note 8. Business Segments
Hecla is organized and managed primarily on the basis of the
principal products being produced from its gold and silver
operating units. One of the operating units has been aggregated
into the Gold segment and three of the operating units have been
aggregated into the Silver segment. General corporate activities
not associated with operating units as well as idle properties
are presented as Other.
16
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
The following tables present information about reportable
segments for the three months and nine months ended September 30
(in thousands):
Three Months Ended Nine Months Ended
------------------- -------------------
September 30, September 30,
2002 2001 2002 2001
-------- -------- -------- --------
Net sales to unaffiliated customers:
Gold $ 13,807 $ 10,634 $ 37,118 $ 28,741
Silver 13,983 11,867 42,718 34,738
-------- -------- -------- --------
$ 27,790 $ 22,501 $ 79,836 $ 63,479
======== ======== ======== ========
Three Months Ended Nine Months Ended
------------------- -------------------
September 30, September 30,
2002 2001 2002 2001
-------- -------- -------- --------
Income (loss) from operations:
Gold $ 5,242 $ 2,848 $ 12,451 $ 6,916
Silver (85) (3,037) 2,567 (5,259)
Other (2,025) (1,949) (5,995) (6,328)
-------- -------- -------- --------
$ 3,132 $ (2,138) $ 9,023 $ (4,671)
======== ======== ======== ========
The following table presents identifiable assets by reportable
segment as of September 30, 2002, and December 31, 2001 (in
thousands):
September 30, December 31,
2002 2001
------------- ------------
Identifiable assets:
Gold $ 38,576 $ 40,489
Silver 83,114 84,845
Discontinued operations 375 2,714
Other 32,918 25,068
--------- ---------
$ 154,983 $ 153,116
========= =========
Note 9. Sale of Building
On April 8, 2002, Hecla completed a sale of its headquarters
building in Coeur d'Alene, Idaho, for $5.6 million in cash.
17
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Proceeds from the sale are for general corporate purposes. Hecla
has leased a portion of the building over a period of five years
and will amortize the gain on the sale of $0.6 million over the
lease term. Hecla has agreed to a five-year lease, including
leasing approximately 50% of the building for two years, at which
time the Company can elect to reduce the amount of lease space to
25% for the remaining three years. The landlord may terminate
the lease during the first two years of the lease subject to
certain restrictions.
Note 10. Tender Offer
On June 13, 2002, Hecla announced its intent to offer to
holders of its Series B Cumulative Convertible Preferred stock to
exchange each of their Preferred shares for seven shares of Hecla
Common stock until July 25, 2002. Hecla offered the holders of
preferred stock the opportunity to exchange their shares at a
higher rate in order to limit the impact of the dividend
arrearages and to eliminate the liquidation preferences for
retired preferred. The dividend arrearages have the effect of
preventing Hecla from paying any dividends on common stock and
entitle the holders of preferred stock to elect two directors to
Hecla's board of directors. The arrearages may hinder Hecla's
ability to raise capital or negotiate third-party mergers and
acquisitions, and may adversely affect the market value of
Hecla's common and preferred stock. In addition, Hecla believed
that the prospect of not receiving future dividends might be
untenable to Hecla's preferred holders and that they should have
the opportunity to exchange their shares for a more actively
traded security. A total of 1,546,598 shares, or 67.2%, of the
total number of preferred shares outstanding was validly tendered
and exchanged into 10,826,186 shares of the Company's common
stock.
In the third quarter of 2002, the Company incurred a non-
cash dividend of approximately $17.6 million related to the
completed exchange offering. The $17.6 million dividend
represents the difference between the value of the common stock
issued in the exchange offer and the value of the shares that
were issuable under the stated conversion terms of the preferred
stock. The non-cash dividend charge had no impact on the
Company's total shareholders' equity, as the offset was an
increase in common stock and surplus. As a result of the
completed exchange offering, the total cumulative preferred
dividends is anticipated to be $23.4 million for the year ending
December 31, 2002. Beginning in 2003, the $8.0 million annual
cumulative preferred dividends that have historically been
included in income (loss) applicable to common shareholders will
be reduced to approximately $2.6 million. The completed exchange
offering also eliminated $10.9 million of previously undeclared
and unpaid preferred stock dividends.
18
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Note 11. Hollister Development Block
On August 2, 2002, the Company, through its wholly owned
subsidiary Hecla Ventures Corporation, entered into an earn-in
agreement with Rodeo Creek Gold, Inc., a wholly owned
subsidiary of Great Basin Gold Ltd. ("Great Basin"), concerning
exploration, development and production on Great Basin's
Hollister Development Block gold property, located on the Carlin
Trend of Nevada. An "earn-in" agreement is an agreement under
which a party must take certain actions in order to "earn" an
interest in an entity. The agreement provides Hecla with an
option to earn a 50% working interest in the Hollister Development
Block in return for funding a two-stage, advanced exploration and
development program leading to commercial production, estimated
to cost $21.8 million. Hecla intends to fund its earn-in
activities with existing cash and cash equivalents, future cash
flow from operations and amounts available under existing credit
agreements. Hecla is obligated to fund the first stage estimated
to cost $10 million. Upon earn-in, Hecla will operate the mine.
Pursuant to the Earn-In Agreement, each of the Company and
Great Basin have agreed to issue a series of warrants to the
other party, to purchase their common stock exercisable within
two years, at prevailing market prices at the time of their
issuance. At execution of the agreement, the Company issued a
warrant to purchase 2.0 million shares of Hecla common stock to
Great Basin and Great Basin issued warrants to purchase 1.0
million shares of its common stock to Hecla. The warrant to
purchase Hecla common stock is exercisable on or before August 1,
2004 at $3.73 per share. The beneficial owner of the warrant to
purchase Hecla common stock is Great Basin Gold Ltd. The
agreement obligates the Company to issue a warrant to purchase an
additional 1.0 million shares of Hecla common stock to Great
Basin when Hecla decides to commence certain development
activities, and an additional warrant to purchase 1.0 million
shares of Hecla common stock following completion of such
activities. Great Basin will issue warrants to purchase 500,000
shares of its common stock to the Company immediately upon
receipt of the second and third warrants to purchase Hecla stock.
The Company has entered into a registration rights agreement with
Great Basin that requires Hecla to use reasonable efforts to
cause the shares underlying the respective warrants to be
registered within four months of the date the warrants are
issued. The Company has filed a registration statement with
respect to the shares, although such registration statement is
not yet effective. For additional information relating to the
registration rights agreement, see Note 14 of Notes to
Consolidated Financial Statements. In addition to the foregoing,
the Company will pay to Great Basin from Hecla's share of
19
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
commercial production a sliding scale royalty that is dependent
on the cash operating profit per ounce of gold equivalent
production.
Note 12. Block B
In March 2002, Hecla announced it had been awarded the
Block B exploration and mining lease near El Callao in the
Venezuelan State of Bolivar by CVG-Minerven (a Venezuelan
government-owned gold mining company). Block B is a 1,795-
hectare land position in the historic El Callao gold district
that includes the historic Chile, Laguna and Panama mines, which
produced over 1.5 million ounces of gold between 1921 and 1946.
Pursuant to the agreement with CVG-Minerven, the Company paid CVG-
Minerven $500,000 on September 6, 2002. Six months thereafter,
an additional payment of $1.25 million will be required, with a
final payment of $1.0 million due in September 2003. The Company
will also pay CVG-Minervan a royalty of 2% to 3% (depending on
the gold price) on production from Block B.
Note 13. New Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 143 "Accounting for
Asset Retirement Obligations," which amends SFAS No. 19, and
establishes a uniform methodology for accounting for estimated
reclamation and abandonment costs. This statement requires that
the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The statement is
required to be adopted by January 1, 2003, and the Company will
record the estimated present value of reclamation liabilities and
increase the carrying value of related assets. Subsequently,
reclamation costs will be allocated to expense over the life of
the related assets and will be adjusted for changes resulting
from the passage of time and changes to either the timing or
amount of the original present value estimate underlying the
obligation. The Company is currently in the process of
quantifying the effect the adoption of this statement will have
on the Company's consolidated financial statements.
The FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-
lived assets and supersedes SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" and the accounting and reporting provisions of APB
Opinion No. 30 "Reporting the Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and
20
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Transactions." This statement became effective for fiscal years
beginning after December 15, 2001 and did not have an effect on
the Company's consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145 "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections." SFAS No. 145 updates,
clarifies and simplifies existing accounting pronouncements, by
rescinding SFAS No. 4, which required all gains and losses from
extinguishments of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax
effects. As a result, the criteria in Accounting Principles
Board Opinion No. 30 will now be used to classify those gains and
losses. Additionally, SFAS No. 145 amends SFAS No. 13 to require
that certain lease modifications that have economic effects
similar to sale-leaseback transactions be accounted for in the
same manner as sale-leaseback transactions. Finally, SFAS
No. 145 also makes technical corrections to existing
pronouncements. While those corrections are not substantive in
nature, in some instances, they may change accounting practice.
The provision of SFAS No. 145 that amends SFAS No. 13 is
effective for transactions occurring after May 15, 2002, with all
other provisions of SFAS No. 145 being required to be adopted by
the Company in its consolidated financial statements for the
first quarter of fiscal 2003. Management currently believes that
the adoption of SFAS No. 145 will not have a material impact on
the Company's consolidated financial statements.
On July 30, 2002, the FASB issued SFAS No. 146 "Accounting
for Costs Associated with Exit or Disposal Activities." SFAS No.
146 requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the
date of a commitment to an exit or disposal plan. Examples of
costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a
restructuring, discontinued operation, plant closing or other
exit or disposal activity. SFAS No. 146 replaces the prior
guidance that was provided by EITF Issue No. 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 is to be applied prospectively to
exit or disposal activities initiated after December 31, 2002.
Management currently believes the adoption of SFAS No. 146 will
not have a material impact on the Company's consolidated
financial statements.
In October 2002, the FASB issued SFAS No. 147 "Acquisitions
of Certain Financial Institutions - an amendment of FASB
Statements No. 72 and 144 and FASB Interpretation No. 9." SFAS
No. 147 removes the special distinction of financial institution
21
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
acquisitions from the scope of both SFAS No. 72 and FASB
Interpretation No. 9. The former method of recognizing any
excess of the fair value of liabilities assumed over the fair
value of tangible and identifiable assets as an unidentifiable
intangible asset no longer applies to acquisitions of financial
institutions or branches of financial institutions. These
acquisitions will be accounted for in accordance with FASB
Statements Nos. 141 and 142, which will require the recording of
goodwill that is not amortized, but rather tested for impairment.
Further this Statement amends SFAS No. 144, to include in its
scope long-term customer relationships such as depositor and
borrower relationship intangible assets and credit cardholder
intangible assets. The adoption of SFAS No. 147 will not have
any impact on the Company's consolidated financial statements.
Note 14. Subsequent Events
During October 2002, the Company filed a Registration
Statement with the Securities and Exchange Commission covering
5,995,248 shares of Hecla common stock that may be offered or
sold from time to time by Great Basin Gold Ltd. ("Great Basin"),
Hecla Mining Company Retirement Plan and Lucky Friday Pension
Plan. Although this Registration Statement has been filed, the
Statement has not become effective. For additional information
regarding Great Basin, see Note 11 of Notes to Consolidated
Financial Statements.
Hecla Mining Company Retirement Plan and Lucky Friday
Pension Plan (the Hecla Benefit Plans) are employee benefit plans
in which certain employees can participate. Copper Mountain
Trust, the trustee for each Hecla Benefit Plan purchased Hecla
stock at the instruction of each Hecla Benefit Plan's independent
fiduciary, Consulting Fiduciaries, Inc. In connection with the
purchase, each plan received the right to request that the Company
register the shares of common stock held by each plan. In
connection with prudent investment strategy and in order to comply
with certain guidelines governing the concentration and size of
investments held by Hecla employee benefit plans, Hecla's board
of directors has instructed management to work with the Hecla
Benefit Plans to reduce their equity investments including Hecla
common stock.
22
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations
-----------------------------------
A 111-year-old company, Hecla Mining Company has long been
known as a precious metals producer and is involved in the
mining, processing, development and exploration of gold, silver,
lead and zinc. The Company is operated and organized into two
segments, gold and silver, and has a small industrial minerals
subsidiary, currently being marketed for sale. Hecla produced
significantly more gold in both the second and third quarters of
2002 than at any time in its history, while continuing to be a
low-cost silver producer. Although Hecla is positively impacted
by increases in metals prices, its efforts to reduce costs of
operations, improve production, increase its cash position and
reduce debt enhance the Company's ability to operate even in
precious metals price environments at levels below those of the
last nine months.
On June 13, 2002, Hecla announced its intent to offer to
holders of its Series B Cumulative Convertible Preferred stock to
exchange each of their Preferred shares for seven shares of Hecla
Common stock until July 25, 2002. Hecla offered the holders of
preferred stock the opportunity to exchange their shares at a
higher rate in order to limit the impact of the dividend
arrearages and to eliminate the liquidation preferences for
retired preferred. The dividend arrearages have the effect of
preventing Hecla from paying any dividends on common stock and
entitle the holders of preferred stock to elect two directors to
Hecla's board of directors. The arrearages may hinder Hecla's
ability to raise capital or negotiate third-party mergers and
acquisitions, and may adversely affect the market value of
Hecla's common and preferred stock. In addition, Hecla believed
that the prospect of not receiving future dividends might be
untenable to Hecla's preferred holders and that they should have
the opportunity to exchange their shares for a more actively
traded security.
As a result of the completed exchange offering, 1,546,598
shares, or 67.2%, of the total number of preferred shares
previously outstanding (2.3 million), was validly tendered and
exchanged into 10,826,186 shares of common stock. Also as a
result of the offering, the $8.0 million annual cumulative
preferred dividends that have historically been included in
income (loss) applicable to common shareholders will be reduced
to approximately $2.6 million beginning in 2003. Additionally,
$10.9 million of previously undeclared and unpaid preferred stock
dividends were eliminated. During the third quarter, the Company
incurred a non-cash dividend of approximately $17.6 million,
23
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
which represents the difference between the value of the common
stock issued in the exchange offer and the value of the shares
that were issuable under the stated conversion terms of the
preferred stock. For additional information relating to the
exchange offering, see Note 10 of Notes to Consolidated Financial
Statements.
On August 2, 2002, the Company, through its wholly owned
subsidiary Hecla Ventures Corporation, entered into an earn-in
agreement with Rodeo Creek Gold, Inc., a wholly owned subsidiary
of Great Basin Gold Ltd. ("Great Basin"), concerning exploration,
development and production on Great Basin's Hollister Development
Block gold property, located on the Carlin Trend of Nevada.
The agreement provides Hecla with an option to earn a 50% working
interest in the Hollister Development Block in return for funding
a two-stage, advanced exploration and development program leading
to commercial production, estimated to cost $21.8 million. Upon
earn-in, Hecla will operate the mine. For additional information
relating to the Hollister Development Block, see Note 11 of Notes
to Consolidated Financial Statements.
In March 2002, Hecla announced it had been awarded the
Block B exploration and mining lease near El Callao in the
Venezuelan State of Bolivar by CVG-Minerven (a Venezuelan
government-owned gold mining company). Block B is a 1,795-
hectare land position in the historic El Callao gold district
that includes the historic Chile, Laguna and Panama mines, which
produced over 1.5 million ounces of gold between 1921 and 1946.
Pursuant to the agreement with CVG-Minerven, the Company paid CVG-
Minerven $500,000 on September 6, 2002. Six months thereafter,
an additional payment of $1.25 million will be required, with a
final payment of $1.0 million due September 2003. The Company
will also pay CVG-Minervan a sliding scale royalty of 2% to 3%
(depending on the gold price) on production from Block B.
RESULTS OF OPERATIONS
- ---------------------
Hecla recorded net income, before preferred stock dividends,
of approximately $6.8 million ($0.09 per common share) and $5.5
million ($0.08 per common share) in the first nine months of 2002
and 2001, respectively. Before preferred stock dividends, Hecla
recorded net income of approximately $1.5 million ($0.02 per
common share) in the third quarter of 2002 compared to a net loss
of approximately $2.5 million ($0.03 per common share) in the
third quarter of 2001.
24
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
The Company's net income for the nine months ended
September 30, 2002 and 2001 includes a loss from discontinued
operations of approximately $1.3 million ($0.02 per common share)
in the first nine months of 2002 and income of approximately
$12.5 million ($0.18 per common share) in the same period in
2001. The income from discontinued operations in 2001 is
principally due to a gain of $13.0 recognized on the sale of the
majority of Hecla's industrial minerals segment in March 2001.
Hecla recorded a loss from discontinued operations of
approximately $0.5 million and $0.4 million in the third quarters
of 2002 and 2001, respectively.
During 2000, in furtherance of Hecla's determination to
focus its operations on gold and silver mining and to raise cash
to retire debt and provide working capital, Hecla's board of
directors made the decision to sell the industrial minerals
segment. On March 27, 2001, Hecla completed a sale of the
Kentucky-Tennessee Clay Company, Kentucky-Tennessee Feldspar
Corporation, Kentucky-Tennessee Clay de Mexico and certain other
minor inactive industrial minerals companies (collectively the K-
T Group) and recorded a gain of $13.0 million in the first
quarter of 2001. On March 5, 2002, Hecla completed a sale of the
pet operations of Colorado Aggregate division (CAC) of MWCA, a
wholly owned subsidiary of Hecla, for $1.6 million in cash. The
sale of the pet operations did not result in a gain or loss.
Hecla recorded losses applicable to common shareholders of
approximately $15.8 million ($0.20 per common share) and $0.5
million ($0.01 per common share) in the first nine months of 2002
and 2001, respectively, and approximately $17.0 million ($0.20
per common share) and $4.5 million ($0.06 per common share) in
the third quarters of 2002 and 2001. Included in the losses
applicable to common shareholders were preferred stock dividends
of $22.6 million and $6.0 million for the first nine months of
2002 and 2001, respectively, and $18.6 million and $2.0 million
in the third quarters of 2002 and 2001, respectively. The 2002
dividends include a non-cash dividend of approximately $17.6
million related to the completed preferred stock exchange
offering.
Gold Operations
- ---------------
Hecla currently operates the La Camorra mine, located in the
eastern Venezuelan State of Bolivar, approximately 120 miles
southeast of Puerto Ordaz. At the present time, La Camorra is
Hecla's sole gold operating unit.
Sales of product increased by $3.2 million and cost of sales
and other direct production costs as a percentage of sales from
products decreased to 35.5% during the third quarter of 2002 from
25
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
48.4% in the third quarter of 2001. Sales of product increased
by $8.4 million and cost of sales and other direct production
costs as a percentage of sales from products decreased to 38.4%
in the first nine months of 2002 from 48.4% in the first nine
months of 2001. The improvement to sales, as well as to cost of
sales and other direct production costs as a percentage of sales,
for the quarter and nine-month period are primarily due to
increased mine equipment availability and improvements to the
crushing, milling and adsorption capacities, allowing for
increases in tons milled and gold ounces produced. Also
contributing to the improvements were increases in the average
market price of gold, which increased 15% and 14%, respectively,
in the third quarter and nine months ended September 30, 2002, as
compared to the same periods in 2001.
During the first nine months of 2002, La Camorra has
produced approximately 134,000 ounces of gold at a total cash
cost of $130 per gold ounce, a 24% increase in gold production
when compared to approximately 108,000 ounces at a total cash
cost of $134 during the first nine months of 2001. Gold
production at La Camorra is projected to reach approximately
165,000 ounces for the year ending December 31, 2002.
Total gold ounces produced, total cash and total production
costs and average gold realized and London Final prices were as
follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2002 2001 2002 2001
-------- -------- -------- --------
Gold ounces produced:
La Camorra 48 40 134 108
San Sebastian 10 5 30 10
Greens Creek (1) 7 6 23 20
Total cash costs per ounce ($/oz.)(2) 121 128 130 134
Total production costs per ounce ($/oz.)(2) 191 190 199 201
Average Metals Prices:
Gold-Realized ($/oz.) 305 283 302 280
Gold-London Final ($/oz.) 314 274 306 269
(1) Reflects Hecla's portion.
(2) Costs per ounce of gold are based on the gold produced by
the gold segment only. Gold produced in the silver segment (San
Sebastian and Greens Creek) is treated as a byproduct credit in
calculating silver costs per ounce.
26
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Silver Operations
- -----------------
For the quarter and nine months ended September 30, 2002,
the silver segment reported a loss from operations of $0.1
million and income of $2.6 million, respectively, compared to
gross losses from operations of $3.0 million and $5.3 million,
respectively, for the quarter and nine months ended September 30,
2001. Sales of products increased by $2.1 million and cost of
sales and other direct production costs as a percentage of sales
from products decreased to 75.7% in the third quarter of 2002
from 100.0% in the third quarter of 2001. Sales of products
increased by $8.0 million and cost of sales and other direct
production costs as a percentage of sales from products decreased
to 70.2% in the first nine months of 2002 from 89.7% in the first
nine months of 2001.
The consolidated improvements in the silver segment
primarily are a result of reducing production from the higher
cost Lucky Friday mine, increasing production from the lower cost
San Sebastian mine and lower costs at the Greens Creek mine.
Hecla's silver production totaled 2.1 million and 6.4 million
ounces, respectively, for the quarter and nine months ended
September 30, 2002, as compared to 1.8 million and 5.9 million
silver ounces, respectively, in the same periods during 2001.
The average total cash cost decreased 41% and 36%, respectively,
during the third quarter and nine months ended September 30,
2002, when compared to the same periods during 2001.
Total silver ounces produced, total cash and total
production costs and average metals prices were as follows (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------
2002 2001 2002 2001
-------- -------- -------- --------
Silver ounces produced 2,079 1,799 6,423 5,897
Total cash costs per ounce ($/oz.)(1)(2) 2.34 3.95 2.22 3.45
Total production costs per ounce ($/oz.)(1)(2) 3.76 5.60 3.69 4.88
Average Metals Prices:
Silver-Handy & Harman ($/oz.) 4.70 4.28 4.65 4.41
Gold-London Final ($/oz.) 314 274 306 269
Lead-LME Cash ($/pound) 0.195 0.213 0.208 0.215
Zinc-LME Cash ($/pound) 0.347 0.375 0.354 0.420
27
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
(1) During the quarter and nine months ended September 30, 2002,
approximately $0.2 million and $0.6 million, respectively, of
costs were classified as care-and-maintenance costs and excluded
in the determination of the cost per ounce at Lucky Friday.
Including the care-and-maintenance costs, the total cash and
total production costs per ounce total $2.44 and $3.85,
respectively, for the third quarter of 2002 and $2.32 and $3.78,
respectively, for the first nine months of 2002.
(2) Includes byproduct credits from gold, lead and zinc
production pursuant to standards of the Gold Institute.
For the quarter and nine months ended September 30, 2002,
the San Sebastian mine, located in the State of Durango, Mexico,
reported sales of $5.5 million and $17.6 million, compared to
$2.1 million and $4.5 million in the same periods of 2001, a
result of the commencement of operations in May 2001. During the
first nine months of 2002, San Sebastian produced approximately
2.5 million ounces of silver at a low total cash cost of $1.29
per silver ounce. Silver and gold production at San Sebastian
are estimated to be approximately 3.3 million ounces and 40,000
ounces, respectively, for the year ended December 31, 2002.
The Greens Creek mine, a 29.73%-owned joint-venture
arrangement with Kennecott Greens Creek Mining Company located on
Admiralty Island, near Juneau, Alaska, reported sales of $6.5
million and $18.2 million for the quarter and nine months ended
September 30, 2002, as compared to $5.9 million and $16.3 million
during the same periods in 2001, primarily due to higher tonnage
throughput resulting in higher concentrate tons produced and
better recoveries in the gravity circuit, leading to improved
lead/silver/gold distributions. Greens Creek's silver production
remained approximately the same at 2.5 million ounces for the
first nine months of 2002 and 2001, and production of gold ounces
and lead and zinc tons increased by approximately 18%, 12% and
15%, respectively. The total cash cost per silver ounce decreased
from $2.24 in the first nine months of 2001 to $1.76 in the first
nine months of 2002. For the year ending December 31, 2002,
production is forecasted to total approximately 3.2 million
silver ounces, 28,000 ounces of gold and 8,000 and 24,000 tons of
lead and zinc, respectively.
The Lucky Friday mine, located in northern Idaho and a
producing mine for Hecla since 1958, reported sales of
approximately $2.0 million and $6.9 million for the quarter and
nine months ended September 30, 2002, as compared to $3.9 million
and $13.9 million during the same periods in 2001, a reflection
of the reduction to approximately 30% of historical production
beginning October 2001, a decision made based on the decline of
silver and lead prices.
The Company estimates with minimal additional development,
the mine can sustain the lower production levels through 2004 and
will continue to operate as long as the cost of operating is less
than putting the property on care and maintenance. For the third
28
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
quarters of 2002 and 2001, the total cash cost per silver ounce
was $5.50 and $5.59, respectively. The total cash cost per
silver ounce decreased from $4.95 in the first nine months of
2001 to $4.65 in the first nine months of 2002. During the third
quarter and the first nine months of 2002, approximately $0.2
million and $0.6 million, respectively, of costs were classified
as care-and-maintenance costs and excluded from the determination
of the costs per ounce at Lucky Friday. Including the care-and-
maintenance costs, the total cash cost per ounce was $5.96 for
the third quarter and $5.08 for the nine months ended September
30, 2002. For the year ending December 31, 2002, production is
forecasted to total approximately 1.7 million silver ounces and
9,000 tons of lead, as compared with total actual production for
the year ended December 31, 2001, of 3.2 million silver ounces
and 21,000 tons of lead, respectively.
Corporate Matters
- -----------------
Interest expense decreased $1.9 million, or 58%, in the
first nine months of 2002, compared to the first nine months of
2001, primarily the result of repayment of a $55.0 million term
loan facility in March 2001. Interest expense decreased $0.2
million in the third quarter 2002 as compared to the third
quarter of 2001.
Miscellaneous expense decreased $0.7 million (44%) in the
nine months ending September 30, 2002, compared to the same
period in 2001, primarily due to a foreign exchange gain ($1.2
million) in 2002 due to the devaluation of the Venezuelan
Bolivar, offset by accruals for tax offset bonuses on employee
stock option plans ($0.4 million) and legal, consulting and
accounting expenses regarding the Company's preferred stock
tender offer and various other corporate matters. Miscellaneous
expense increased $0.3 million (41%) in the third quarter 2002 as
compared to the same period in 2001 primarily due to a foreign
exchange loss associated with the continued fluctuation of the
Venezuela Bolivar ($0.6 million) in 2002, partially offset by a
quarter-on-quarter positive foreign exchange variance in Mexico
($0.2 million).
Hecla's provision for closed operations and environmental
matters increased $0.3 million (120%) during the third quarter of
2002, compared to the third quarter of 2001, primarily due to a
provision for future reclamation and other closure costs at
various closed properties. Hecla's provision for closed
operations and environmental matters decreased $0.5 million (37%)
in the first nine months of 2002, compared to the same period in
2001, primarily due to decreased expenditures relating to the
Coeur d'Alene Basin litigation ($0.8 million), partly offset by
the abovementioned adjustment for future reclamation and other
closure costs ($0.3 million).
29
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Interest and other income decreased $1.1 million (74%) and
$1.1 million (42%), in the quarter and nine months ending
September 30, 2002, compared to the same periods in 2001,
primarily due to decreased pension income ($0.5 million and $1.4
million, respectively) and gains recognized on the sale of assets
during 2001 ($0.4 million and $0.4 million, respectively). Mark
to market adjustments on the Company's outstanding gold lease
rate swap were lower during the third quarter of 2002 ($0.2
million), as compared to the third quarter of 2001, although for
the nine months ended September 30, 2002, the Company reported an
overall positive mark to market adjustment of $0.6 million when
compared to the nine months ended September 30, 2001.
Exploration expense increased $0.8 million (176%) and $1.2
million (71%), in the quarter and nine months ending September
30, 2002, compared to the same periods in 2001, primarily due to
increased exploration expenditures in Venezuela ($0.3 million and
$1.0 million, respectively) and Mexico ($0.5 million and $0.2
million, respectively).
EXPLORATION ACTIVITIES
- ----------------------
At the La Camorra gold mine, underground mid-level
exploration drilling to explore the Main Zone and Betzy veins at
depth continued during the third quarter. Exploration drilling
also began at the Isbelia vein. Year-to-date, twenty-five holes
have been drilled for 7,768 meters. Highly variable results were
obtained with sufficient success to warrant the continuation of
the down-dip and plunge deep exploration program.
Underground exploration drilling targeted at the Betzy vein
West Flank from the -230 exploration drift commenced during the
third quarter. Three holes were drilled for 384 meters.
Generally poor, sub-economic mineralization was encountered
during this drill campaign.
In Mexico, twenty-four exploration holes were completed at
San Sebastian on the Francine vein and were part of a program to
explore for extensions to the southeast and at depth. Of these
24 exploration drill holes, 5 intersected gold-silver
mineralization that averaged better than 7 g/t gold equivalent
over a minimum horizontal width of 2 meters. Four of these ore
grade intercepts are located in the target area surrounding
Monarch hole SS-028, and one of these ore grade intercepts is
located in the offset segment of the Francine vein southeast of
the San Ricardo fault.
30
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
The Company also continues its exploration efforts at its
Cerro Pedernalillo silver/gold exploration project, located on
the San Sebastian property. During the third quarter, twenty-
four drill holes were completed. Thirteen of these holes were
drilled on the Don Sergio vein where an ore shoot is beginning to
emerge at the southern most end of the known vein just before it
plunges under post mineral volcanic cover. Of these thirteen
drill holes, five intersected gold-silver mineralization that
average better than 7 g/t gold equivalent over a minimum
horizontal width of 2 meters, with three holes averaging more
than 31 g/t gold equivalent over a minimum horizontal width of 2
meters. Two shallow holes were drilled on the Jessica vein with
disappointing results. Nine holes were drilled on the Andrea
vein. Several of these drill holes intersected anomalous gold
and silver values, however none intersected ore grade
mineralization over a mineable width.
Hecla estimates that exploration expenditures for the
remainder of 2002 will be in the range of $2.5 million to $3.5
million, principally for continued drilling in Venezuela on the
Main vein down-dip extension, the Betzy vein West Flank, at
Canaima and on the Block B concessions, and in Mexico on the
Francine and Don Sergio veins. Other exploration activities
anticipated include an exploration drift to the Gallagher fault
block at Greens Creek and continued permitting activities at the
Hollister Development Block in Nevada.
ENVIRONMENTAL
- -------------
In August 2001, the Company entered into an Agreement in
Principle with the United States and the State of Idaho to settle
the governments' claims for natural resource damages and clean-up
costs related to the historic mining practices in the Coeur
d'Alene Basin in northern Idaho. Due to a number of changes that
have occurred since the signing of the Agreement in Principle,
including improvements in the environmental conditions at Grouse
Creek and lower estimated clean-up costs in the Coeur d'Alene
Basin as well as the Company's improved financial condition, the
terms of the multiple properties settlement approach set forth in
the Agreement in Principle appear no longer favorable to the
Company. Therefore, the United States, the State of Idaho and
the Company have agreed to discontinue utilizing the Agreement in
Principle as a settlement vehicle. However, Hecla anticipates
further settlement negotiations with the United States and the
State of Idaho to limit its environmental clean-up liabilities
for historic mining practices in the Coeur d'Alene Basin. Due to
a number of uncertainties related to this matter, including the
outcome of pending litigation and the result of any settlement
negotiations, the Company does not have the ability to estimate
what, if any,
31
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
liability exists related to the Coeur d'Alene River Basin at this
time. It is reasonably possible the Company's ability to
estimate what, if any, obligation relating to the Coeur d'Alene
Basin may change in the near or long term depending on a number
of factors. In addition, an adverse ruling against the Company
for liability and damages in this matter could have a material
adverse effect on Hecla. For additional information, see Note 5
of the Notes to Consolidated Financial Statements.
Reserves for closure costs, reclamation and environmental
matters totaled $50.7 million at September 30, 2002. Hecla
anticipates that expenditures relating to these reserves will be
made over the next several years. Although Hecla believes the
reserve is adequate based on current estimates of aggregate
costs, Hecla periodically reassesses its environmental and
reclamation obligations as new information is developed.
Depending on the results of the reassessment, it is reasonably
possible that Hecla's estimate of its obligations may change in
the near or long term.
Expenditures for environmental remediation and reclamation
for the remainder of 2002 are estimated in the range of $1.7 to
$2.2 million, principally for water management activities at the
Grouse Creek property and the yard remediation program at the
Bunker Hill Superfund site.
FINANCIAL CONDITION AND LIQUIDITY
- ---------------------------------
Hecla's financial condition improved during the third
quarter, with a current ratio of 1.5 to 1 at September 30, 2002,
compared to 1 to 1 at December 31, 2001, and 1.4 to 1 at June 30,
2002, and cash and cash equivalents of $17.8 million, an increase
of approximately $10.2 million from December 31, 2001. Hecla
believes cash requirements over the next twelve months will be
funded through a combination of current cash, future cash flows
from operations, amounts available under existing loan agreements
and/or future debt or equity security issuances.
Hecla's ability to raise capital is highly dependent upon
the commercial viability of its projects and the associated
prices of metals Hecla produces. Because of the significant
impact that changes in the prices of silver, gold, lead and zinc
have on Hecla's financial condition, declines in these metals
prices may negatively impact short-term liquidity and Hecla's
ability to raise additional funding for long-term projects.
There can be no assurance that Hecla will be successful in
generating adequate funding for planned capital expenditures,
environmental remediation and reclamation expenditures and for
exploration expenditures in the future.
32
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Operating Activities
- --------------------
Operating activities provided approximately $14.6 million of
cash during the first nine months of 2002, primarily from cash
provided by La Camorra, San Sebastian and Greens Creek.
Significant uses of cash included changes in accounts and notes
receivable ($3.7 million), cash required for reclamation
activities and other noncurrent liabilities ($3.5 million),
changes in inventories ($3.2 million), changes in accounts
payable, payroll and other accrued expenses ($0.8 million) and
changes in other current and noncurrent assets ($0.6 million).
Principal noncash elements included charges for depreciation,
depletion and amortization of $17.7 million, an increase in the
provision for reclamation and closure costs ($1.4 million) and a
change in the net assets of discontinued operations ($0.9
million).
Investing Activities
- --------------------
Investing activities required $1.8 million of cash during
the first nine months of 2002. The major use of cash was
additions to properties, plants and equipment ($9.1 million),
primarily at the La Camorra ($4.5 million), Greens Creek ($2.3
million) and San Sebastian ($1.7 million) mines, as well as the
initial payment in September for the Block B exploration and
mining lease in Venezuela ($0.5 million). Hecla currently
anticipates that capital expenditures for the remainder of 2002
will be in the range of $3.0 million to $3.6 million, principally
for expenditures at the abovementioned locations.
The cash used for additions to properties, plants and
equipment is partially offset by proceeds received on the sale of
the corporate headquarters building, which was completed on
April 8, 2002, located in Coeur d'Alene, Idaho ($5.6 million), as
well as the sale of the pet operations of CAC ($1.6 million)
during the first quarter of 2002.
Financing Activities
- --------------------
During the first nine months of 2002, financing activities
used approximately $2.6 million in cash, primarily for the
repayment of debt ($8.5 million). The repayment of debt was
partly offset by borrowings of $3.3 million and proceeds of $2.6
million for common stock issued for outstanding warrants and
employee stock options exercised.
33
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
As of September 30, 2002, Hecla had outstanding debt of
$13.8 million, including $6.4 million due over the next twelve
months. The outstanding debt included project financing
facilities for the La Camorra mine in Venezuela ($5.0 million)
and the Velardena mill at the San Sebastian mine in Mexico ($5.8
million), as well as a $3.0 million subordinated loan.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make a wide variety of estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial
statements, as well as the reported amounts of revenues and
expenses during the reporting periods covered by the financial
statements. Management routinely makes judgments and estimates
about the effect of matters that are inherently uncertain. As
the number of variables and assumptions affecting the future
resolution of the uncertainties increases, these judgments become
even more subjective and complex. Management has identified
certain accounting policies that are most important to the
portrayal of the Company's current financial condition and
results of operations. For the Company's significant accounting
policies, see Note 1 of Notes to Consolidated Financial
Statements filed on Form 10-K for the year ended December 31,
2001.
Revenue Recognition
- -------------------
Sales of metals products sold directly to smelters are
recorded when title and risk of loss transfer to the smelter at
current spot metals prices. The Company must estimate the price
at which metals will be sold in reporting profitability and cash
flow. Recorded values are adjusted monthly until final
settlement at month-end metals prices. Sales of metal in
products tolled, rather than sold to smelters, are recorded at
contractual amounts when title and risk of loss transfer to the
buyer.
Changes in the market price of metals significantly affect
revenues, profitability and cash flow. Metals prices can and
often do fluctuate widely and are affected by numerous factors
beyond Hecla's control, such as political and economic
conditions, demand, forward selling by producers, expectations
for inflation, central bank sales, the relative exchange rate of
the U.S. dollar, purchases and lending, investor sentiment and
global mine production levels. The aggregate effect of these
34
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
factors is impossible to predict. Because significant portions
of revenues are derived from the sale of silver, gold, lead and
zinc, earnings are directly related to the prices of these
metals. If the market price for these metals falls below total
production costs, the Company will experience losses on such
sales.
Proven and Probable Ore Reserves
- --------------------------------
On a periodic basis, management reviews the reserves at each
operation that reflect estimates of the quantities and grades of
mineralized material believed to be recoverable and sold at
prices in excess of the total cost associated with extracting and
processing the ore. Management's calculations of proven and
probable ore reserves are based on in-house engineering and
geological estimates using current operating costs, metals prices
and demand for products.
Reserve estimates will change as existing reserves are
depleted through production, as well as changes in estimates
caused by changing production cost and/or metals prices. Changes
in reserves may also reflect that grades of ore fed to process
may be different from stated reserve grades because of variation
in grades in areas mined, mining dilution and other factors. For
reserves estimated on properties that have not yet commenced
production, recoveries may require revision based on actual
production experience.
Declines in the market price of metals, as well as increased
production or capital costs or reduced recovery rates, may render
ore reserves uneconomic to exploit unless the utilization of
forward sales contracts or other hedging techniques is sufficient
to offset such effects. If the realized price for the metals
produced, including hedging benefits, were to decline
substantially below the levels set for calculation of reserves
for an extended period, there could be material delays in the
development of new projects, increased net losses, reduced cash
flow, restatements or reductions in reserves and asset write-
downs in the applicable accounting periods. Reserves should not
be interpreted as assurances of mine life or of the profitability
of current or future operations. No assurance can be given that
the estimate of the amount of metal or the indicated level of
recovery of these metals will be realized.
Depreciation and Depletion
- --------------------------
Depreciation is based on the estimated useful lives of the
assets and is computed using straight-line and unit-of-production
35
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
methods. Depletion is computed using the unit-of-production
method. The units-of-production method is based on proven and
probable ore reserves. As discussed above, estimates of proven
and probable ore reserves may change, possibly in the near term,
resulting in changes to depreciation, depletion, amortization and
reclamation accrual rates in future reporting periods.
Impairment of Long-Lived Assets
- -------------------------------
Management reviews the net carrying value of all facilities,
including idle facilities, on a periodic basis. The Company
estimates the net realizable value of each property based on the
estimated undiscounted future cash flows that will be generated
from operations at each property, the estimated salvage value of
the surface plant and equipment and the value associated with
property interests. These estimates of undiscounted future cash
flows are dependent upon the estimates of metal to be recovered
from proven and probable ore reserves (see discussion above),
future production cost estimates and future metals price
estimates over the estimated remaining mine life. If
undiscounted cash flows are less than the carrying value of a
property, an impairment loss is recognized based upon the
estimated expected future cash flows from the property discounted
at an interest rate commensurate with the risk involved.
Management's estimates of metals prices, recoverable proven
and probable ore reserves and operating, capital and reclamation
costs are subject to risks and uncertainties of change affecting
the recoverability of the Company's investment in various
projects. Although management believes it has made a reasonable
estimate of these factors based on current conditions and
information, it is reasonably possible that changes could occur
in the near term which could adversely affect management's
estimate of net cash flows expected to be generated from
operating properties and the need for asset impairment write-
downs.
Environmental Matters
- ---------------------
When it is probable that such costs will be incurred and
they are reasonably estimable, the Company will accrue costs
associated with environmental remediation obligations at the most
likely estimate. Accruals for estimated losses from
environmental remediation obligations generally are recognized no
later than completion of the remedial feasibility study for such
facility and are charged to provision for closed operations and
environmental matters. Management periodically reviews the
accrued liabilities for such remediation costs as evidence
36
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
becomes available indicating the remediation liability has
potentially changed. Costs of future expenditures for
environmental remediation are not discounted to their present
value unless subject to a contractually obligated fixed payment
schedule. Such costs are based on management's current estimate
of amounts that are expected to be incurred when the remediation
work is performed within current laws and regulations.
Recoveries of environmental remediation costs from other parties
are recorded as assets when their receipt is deemed probable.
Future closure, reclamation and environment-related
expenditures are difficult to estimate in many circumstances due
to the early stages of investigation, uncertainties associated
with defining the nature and extent of environmental
contamination, the uncertainties relating to specific reclamation
and remediation methods and costs, application and changing of
environmental laws, regulations and interpretations by regulatory
authorities and the possible participation of other potentially
responsible parties. Reserves for closure costs, reclamation and
environmental matters totaled $50.7 million at September 30,
2002. Management anticipates expenditures relating to these
reserves will be made over the next five to ten years. It is
reasonably possible that the ultimate cost of remediation could
change in the future and that changes to these estimates could
have a material effect on future operating results as new
information becomes known.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
In August 2001, the FASB issued SFAS No. 143 "Accounting for
Asset Retirement Obligations," which amends SFAS No. 19, and
establishes a uniform methodology for accounting for estimated
reclamation and abandonment costs. This statement requires that
the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The statement is
required to be adopted by January 1, 2003, and the Company will
record the estimated present value of reclamation liabilities and
increase the carrying value of related assets. Subsequently,
reclamation costs will be allocated to expense over the life of
the related assets and will be adjusted for changes resulting
from the passage of time and changes to either the timing or
amount of the original present value estimate underlying the
obligation. The Company is currently in the process of
quantifying the effect the adoption of this statement will have
on the Company's consolidated financial statements.
37
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
The FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-
lived assets and supersedes SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" and the accounting and reporting provisions of APB
Opinion No. 30 "Reporting the Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." This statement became effective for fiscal years
beginning after December 15, 2001 and did not have an effect on
the Company's consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145 "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections." SFAS No. 145 updates,
clarifies and simplifies existing accounting pronouncements, by
rescinding SFAS No. 4, which required all gains and losses from
extinguishments of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax
effects. As a result, the criteria in Accounting Principles
Board Opinion No. 30 will now be used to classify those gains and
losses. Additionally, SFAS No. 145 amends SFAS No. 13 to require
that certain lease modifications that have economic effects
similar to sale-leaseback transactions be accounted for in the
same manner as sale-leaseback transactions. Finally, SFAS
No. 145 also makes technical corrections to existing
pronouncements. While those corrections are not substantive in
nature, in some instances, they may change accounting practice.
The provision of SFAS No. 145 that amends SFAS No. 13 is
effective for transactions occurring after May 15, 2002, with all
other provisions of SFAS No. 145 being required to be adopted by
the Company in its consolidated financial statements for the
first quarter of fiscal 2003. Management currently believes that
the adoption of SFAS No. 145 will not have a material impact on
the Company's consolidated financial statements.
On July 30, 2002, the FASB issued SFAS No. 146 "Accounting
for Costs Associated with Exit or Disposal Activities." SFAS No.
146 requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the
date of a commitment to an exit or disposal plan. Examples of
costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a
restructuring, discontinued operation, plant closing or other
exit or disposal activity. SFAS No. 146 replaces the prior
guidance that was provided by EITF Issue No. 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 is to be applied prospectively to
exit or disposal
38
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
activities initiated after December 31, 2002. Management
currently believes the adoption of SFAS No. 146 will not have a
material impact on the Company's consolidated financial
statements.
In October 2002, the FASB issued SFAS No. 147 "Acquisitions
of Certain Financial Institutions-an amendment of FASB Statements
No. 72 and 144 and FASB Interpretation No. 9." SFAS No. 147
removes the special distinction of financial institution
acquisitions from the scope of both SFAS No. 72 and FASB
Interpretation No. 9. The former method of recognizing any
excess of the fair value of liabilities assumed over the fair
value of tangible and identifiable assets as a unidentifiable
intangible asset no longer applies to acquisitions of financials
institutions or branches of financial institutions. These
acquisitions will be accounted for in accordance with FASB
Statements Nos. 141 and 142, which will require the recording of
goodwill that is not amortized, but rather tested for impairment.
Further this Statement amends SFAS No. 144, to include in its
scope long-term customer relationships such as depositor and
borrower relationship intangible assets and credit cardholder
intangible assets. The adoption of SFAS No. 147 will not have
any impact on the Company's consolidated financial statements.
OTHER
- -----
Holders of the Preferred Shares are entitled to receive
cumulative cash dividends at the annual rate of $3.50 per share
payable quarterly, when and if declared by the Board of Directors
and have voting rights related to certain amendments to Hecla's
Articles of Incorporation. As of January 31, 2002, Hecla had not
declared and paid the equivalent of six quarterly dividends,
entitling holders of the Preferred Shares to elect two directors
at Hecla's annual shareholders' meeting. On May 10, 2002,
holders of the Preferred Shares, voting as a class, elected two
additional directors.
During October 2002, the Company announced one of the two
directors elected by holders of the Preferred Shares last May
resigned his position as a board member of Hecla to avoid any
potential conflict of interest resulting from his subsequent
employment. In order to fill the vacancy, the remaining director
elected by the Preferred shareholders will name a new
director. It is currently anticipated a new director will be
named by February 2003.
Pursuant to a Registration Statement filed with the
Securities and Exchange Commission ("SEC") and declared effective
in the third quarter of 1995, Hecla can, at its option, issue
debt securities, common shares, preferred shares or warrants in
39
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
an amount not to exceed $100.0 million in the aggregate. As of
September 30, 2002, Hecla has issued $62.2 million of Hecla's
common shares and warrants under the Registration Statement. As
described in Note 10 of Notes to Consolidated Financial
Statements, Hecla's nonpayment of certain dividends due on its
Series B Convertible Preferred Stock makes it ineligible to file
an S-3 registration statement with the SEC and, according to SEC
interpretation, may also make it currently ineligible to maintain
the availability of the registration statement for use by
incorporating updated information from its Form 10-K. As a
result, there can be no assurance that Hecla will be able to
issue further securities under the registration statement.
During October 2002, the Company filed a Registration
Statement with the SEC covering 5,995,248 shares of Hecla common
stock that may be offered or sold from time to time by Great
Basin Gold Ltd. ("Great Basin"), Hecla Mining Company Retirement
Plan and Lucky Friday Pension Plan. For additional information
regarding Great Basin, see Note 11 of Notes to Consolidated
Financial Statements. Although this Registration Statement has
been filed, the Statement has not become effective.
Hecla Mining Company Retirement Plan and Lucky Friday
Pension Plan (the Hecla Benefit Plans) are employee benefit plans
in which certain employees can participate. Copper Mountain
Trust, the trustee for each Hecla Benefit Plan purchased Hecla
stock at the instruction of each Hecla Benefit Plan's independent
fiduciary, Consulting Fiduciaries, Inc. In connection with the
purchase, each plan received the right to request that the Company
register the shares of common stock held by each plan. In
connection with a prudent investment strategy and in order to
comply with certain guidelines governing the concentration and
size of investments held by Hecla employee benefit plans, Hecla's
board of directors has instructed management to work with the
Hecla Benefit Plans to reduce their equity investments including
Hecla common stock.
For information on hedged positions and derivative
instruments, see Item 3 "Quantitative and Qualitative Disclosure
About Market Risk."
40
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Item 3. Quantitative and Qualitative Disclosure About Market
Risk
----------------------------------------------------
The following discussion summarizes the financial
instruments and derivative instruments held by Hecla at
September 30, 2002, none of which are held for trading purposes.
Such instruments are sensitive to changes in interest rates and
commodity prices. Hecla believes there has not been a material
change in its market risk since the end of its last fiscal year.
In the normal course of business, Hecla also faces risks that are
either nonfinancial or nonquantifiable (See "Investment
Considerations" in Part I, Item 1 of Hecla's 2001 Annual Report
on Form 10-K).
Interest-Rate Risk Management
At September 30, 2002, Hecla's debt was subject to changes
in market interest rates and was sensitive to those changes.
Hecla currently has no derivative instruments to offset the risk
of interest rate changes. Hecla may choose to use derivative
instruments, such as interest rate swaps, to manage the risk
associated with interest rate changes.
The following table presents principal cash flows for debt
outstanding at September 30, 2002, by maturity date and the
related average interest rate. The variable rates are estimated
based on implied forward rates in the yield curve at the
reporting date.
(in thousands)
Fair
2002 2003 2004 2005 Thereafter Total Value
-------- -------- -------- -------- ---------- -------- --------
Subordinated debt $ - - $ 2,000 $ 1,000 $ - - $ - - $ 3,000 $ 3,000
Average interest rate 5.6% 5.8% 7.1%
Project financing debt $ 1,500 $ 3,000 $ 500 $ - - $ - - $ 5,000 $ 5,000
Average interest rate 4.1% 4.3% 5.6%
Project financing debt $ 338 $ 2,278 $ 832 $ 1,366 $ 960 $ 5,774 $ 5,774
Average interest rate 13% 13% 13% 13% 13%
41
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Commodity-Price Risk Management
Hecla uses commodity forward sales commitments, commodity
swap contracts and commodity put and call option contracts to
manage its exposure to fluctuation in the prices of certain
metals which it produces. Contract positions are designed to
ensure that Hecla will receive a defined minimum price for
certain quantities of its production. Hecla uses these
instruments to reduce risk by offsetting market exposures. Hecla
is exposed to certain losses, generally the amount by which the
contract price exceeds the spot price of a commodity, in the
event of nonperformance by the counter parties to these
agreements. The instruments held by Hecla are not leveraged and
are held for purposes other than trading. Hecla intends to
physically deliver metals in accordance with the terms of the
forward sales contracts. As such, Hecla has elected to designate
the contracts as normal sales in accordance with SFAS 138 and as
a result, these contracts are not required to be accounted for as
derivatives under SFAS 133.
The following table provides information about Hecla's
forward sales contracts at September 30, 2002. The table
presents the notional amount in ounces, the average forward sales
price and the total-dollar contract amount expected by the
maturity dates, which occur between December 31, 2002, and
December 31, 2004. As of September 30, 2002, the mark to market
value of the contracts was a loss of $5.0 million. Hecla is
subject to a posting margin if the margin free limit of $10.0
million in the aggregate for all contracts is exceeded. At
September 30, 2002, the London Final gold price was $323.70.
Expected Expected Expected Estimated
Maturity Maturity Maturity Fair
2002 2003 2004 Value
-------- -------- -------- ---------
Forward contracts:
Gold sales (ounces) 15,056 59,802 48,928
Future price (per ounce) $ 288 $ 288 $ 288
Contract amount (in $000's) $ 4,340 $17,238 $14,103 $ (4,998)
Estimated % of annual production
committed to contracts 30% 28% 25%
In addition to the above contracts, Hecla has a quarterly
Gold Lease Rate Swap at a fixed rate of 1.5% on 108,730 ounces of
the above gold forward contracts. The ounces covered under the
swap are adjusted each quarter, in accordance with the expiration
of the gold forward contracts. At September 30, 2002, the fair
value of the Gold Lease Rate Swap was $364,000, which represents
the amount the counterparty would have to pay the Company if the
contract was terminated.
42
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Item 4. Controls and Procedures
- ------- -----------------------
An evaluation was performed under the supervision and with
the participation of the Company's management, including the
Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO"), of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on that
evaluation, the Company's management, including the CEO and CFO,
concluded the Company's disclosure controls and procedures were
effective as of September 30, 2002, in ensuring that all material
information required to be filed in this quarterly report has
been made known to them in a timely fashion.
There have been no significant changes in the Company's
internal controls or in other factors that could significantly
affect internal controls subsequent to September 30, 2002.
43
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
FORWARD-LOOKING AND OTHER STATEMENTS
- ------------------------------------
Statements made in Management's Discussion and Analysis of
Financial Condition and Results of Operations and Quantitative
and Qualitative Disclosure About Market Risk which are not
historical facts, such as anticipated payments, litigation
outcome, production, sales of assets, exploration results and
plans, costs, prices or sales performance are "forward-looking
statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, and involve a number of risks and
uncertainties that could cause actual results to differ
materially from those projected, anticipated, expected or
implied. These risks and uncertainties include, but are not
limited to, metals price volatility, volatility of metals
production, exploration risks and results, project development
risks and ability to raise financing. The Company undertakes no
obligation and has no intention of updating forward-looking
statements.
44
Part II - Other Information
Hecla Mining Company and Subsidiaries
Item 1. Legal Proceedings
- ------ -----------------
For information concerning legal proceedings, refer to Note
5 of Notes to Consolidated Financial Statements.
Item 2. Changes in Securities and Use of Proceeds
- ------ -----------------------------------------
See Note 11 of Notes to Consolidated Financial Statements
for a description of unregistered warrants issued by Hecla to
Great Basin. The sale of warrants was exempt from registration
under Section 5 of the Securities Act pursuant to Section 4(2) of
the Securities Act and pursuant to Rule 506 of Regulation D under
the Securities Act.
Item 3. Defaults Upon Senior Securities
- ------ -------------------------------
As of September 30, 2002, we have not declared or paid $5.9
million of Series B Convertible Preferred stock dividends.
However, see Note 10 of Notes to Consolidated Financial
Statements for further information on Series B Convertible
Preferred stock dividends and the impact of an exchange offer
completed July 25, 2002.
Item 4. Annual Meeting of Shareholders
- ------ ------------------------------
See registrant's report on Form 10-Q/A filed October 29,
2002, for information regarding the adjourned annual meeting of
shareholders held July 18, 2002.
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) Exhibits*
See the exhibit index to this Form 10-Q for the list of exhibits.
(b) Reports on Form 8-K
None
Item 5 of Part II is omitted from this report as inapplicable.
_________________________
*Certain long-term debt instruments of the registrant or its
subsidiaries, the authorized principal amount of which does not
exceed 10% of the registrant's consolidated assets, are not filed
pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. The
registrant agrees to furnish a copy of any such instrument to the
Commission upon request.
45
Hecla Mining Company and Subsidiaries
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HECLA MINING COMPANY
------------------------------------
(Registrant)
Date: November 14, 2002 By /s/ Arthur Brown
----------------------------------
Arthur Brown, Chairman and
Chief Executive Officer
Date: November 14, 2002 By /s/ Phillips S. Baker, Jr.
---------------------------------
Phillips S. Baker, Jr., President,
Chief Operating Officer and Chief
Financial Officer
Date: November 14, 2002 By /s/ Lewis E. Walde
--------------------------------
Lewis E. Walde, Vice President - Controller
(Chief Accounting Officer)
46
Hecla Mining Company and Subsidiaries
CERTIFICATIONS
I, Arthur Brown, Chairman and Chief Executive Officer of Hecla Mining Company
("Hecla"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hecla Mining Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
47
Hecla Mining Company and Subsidiaries
CERTIFICATIONS (Continued)
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ Arthur Brown
----------------------------
Arthur Brown
Chairman and Chief Executive Officer
48
Hecla Mining Company and Subsidiaries
CERTIFICATIONS
I, Arthur Brown, Chairman and Chief Executive Officer of Hecla Mining Company
("Hecla"), certify that to the best of my knowledge:
1. This quarterly report of Hecla on Form 10-Q ("report") fully complies with
the requirements of section 13(a) or 15(d) of the Securities Exchange Act
of 1934; and
2. The information contained in the report fairly presents, in all material
respects, the financial condition and results of operations of Hecla.
Date: November 14, 2002
/s/ Arthur Brown
---------------------------------
Arthur Brown
Chairman and Chief Executive Officer
49
Hecla Mining Company and Subsidiaries
CERTIFICATIONS
I, Phillips S. Baker, Jr., President, Chief Operating Officer and Chief
Financial Officer of Hecla Mining Company ("Hecla"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hecla Mining Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
50
Hecla Mining Company and Subsidiaries
CERTIFICATIONS (Continued)
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 11, 2002
/s/ Phillips S. Baker, Jr.
------------------------------------
Phillips S. Baker, Jr.
President, Chief Operating Officer and
Chief Financial Officer
51
Hecla Mining Company and Subsidiaries
CERTIFICATIONS
I, Phillips S. Baker, Jr., President, Chief Operating Officer and Chief
Financial Officer of Hecla Mining Company ("Hecla"), certify that to the
best of my knowledge:
1. This quarterly report of Hecla on Form 10-Q ("report") fully complies with
the requirements of section 13(a) or 15(d) of the Securities Exchange Act
of 1934; and
2. The information contained in the report fairly presents, in all material
respects, the financial condition and results of operations of Hecla.
Date: November 14, 2002
/s/ Phillips S. Baker, Jr.
-------------------------------
Phillips S. Baker, Jr.
President, Chief Operating Officer and
Chief Financial Officer
52
Exhibit Index
Exhibit No. Description
- ----------- -----------
3.1(a) Certificate of Incorporation of the Registrant as
amended to date. Filed as exhibit 3.1 to
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1987 (File No. 1-8491) and
incorporated herein by reference.
3.1(b) Certificate of Amendment of Certificate of
Incorporation of the Registrant. Filed as exhibit
3.1(b) to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1987 (File No. 1-
8491) and incorporated herein by reference.
3.2 By-Laws of the Registrant as amended to date.
Filed as exhibit 3(ii) to Registrant's Current
Report on Form 8-K dated November 13, 1998 (File
No. 1-8491) and incorporated herein by reference.
4.1(a) Certificate of Designations, Preferences and
Rights of Series A Junior Participating Preferred
Stock of the Registrant. Filed as exhibit
4.1(d)(e) to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1993 (File No.
1-8491) and incorporated herein by reference.
4.1(b) Certificate of Designations, Preferences and
Rights of Series B Cumulative Convertible
Preferred Stock of the Registrant. Filed as
exhibit 4.5 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1993
(File No. 1-8491) and incorporated herein by
reference.
4.2 Rights Agreement dated as of May 10, 1996, between Hecla
Mining Company and American Stock Transfer & Trust
Company, which includes the form of Rights Certificate of
Designation setting forth the terms of the Series A Junior
Participating Preferred Stock of Hecla Mining Company as
Exhibit A and the summary of Rights to Purchase Preferred
Shares as Exhibit B. Filed as exhibit 4 to Registrant's
Current Report on Form 8-K dated May 10, 1996 (File No.
1-8491) and incorporated herein by reference.
4.3 Stock Purchase Agreement dated as of August 27, 2001
between Hecla Mining Company and Copper Mountain Trust.
Filed on October 7, 2002 as exhibit 4.3 to Registrant's
Registration Statement on Form S-1 (File No. 333-100395)
and incorporated herein by reference.
53
4.4 Warrant Agreement dated August 2, 2002
between Hecla Mining Company and Great Basin Gold
Ltd. Filed on October 7, 2002 as exhibit 4.4 to
Registrant's Registration Statement on Form S-1
(File No. 333-100395) and incorporated herein by
reference.
4.5 Registration Rights Agreement dated August 2,
2002 between Hecla Mining Company and Great Basin
Gold Ltd. Filed on October 7, 2002 as exhibit 4.5
to Registrant's Registration Statement on Form S-1
(File No. 333-100395) and incorporated herein by
reference.
10.1 Employment agreement dated June 1, 2000,
between Hecla Mining Company and Arthur Brown.
(Registrant has substantially identical agreements
with each of Messrs. Phillips S. Baker, Jr., Vicki
J. Veltkamp, Thomas F. Fudge and Lewis E. Walde.
Such substantially identical agreements are not
included as separate Exhibits.) Filed as exhibit
10.2 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2000 (File No.
1-8491) and incorporated herein by reference.
10.2(a) 1987 Nonstatutory Stock Option Plan of the
Registrant. Filed as exhibit B to Registrant's
Proxy Statement dated March 20, 1987 (File No. 1-
8491) and incorporated herein by reference.
10.2(b) Hecla Mining Company 1995 Stock Incentive Plan.
Filed as exhibit 10.4(c) to Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30,
2001 (File No. 1-8491) and incorporated herein by
reference.
10.2(c) Hecla Mining Company Stock Plan for Nonemployee
Directors. Filed as exhibit B to Registrant's
Proxy Statement dated March 27, 1995 (File No. 1-
8491) and incorporated herein by reference.
10.2(d) Hecla Mining Company Key Employee Deferred
Compensation Plan. Filed as exhibit 4.3 to
Registrant's Registration Statement on Form S-8
filed on July 24, 2002 (File No. 1-8491) and
incorporated herein by reference.
10.3(a) Hecla Mining Company Retirement Plan for Employees
and Supplemental Retirement and Death Benefit
Plan. Filed as exhibit 10.11(a) to Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1985 (File No. 1-8491) and
incorporated herein by reference.
54
10.3(b) Supplemental Excess Retirement Master Plan
Documents. Filed as exhibit 10.5(b) to
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994 (File No. 1-8491) and
incorporated herein by reference.
10.3(c) Hecla Mining Company Nonqualified Plans Master
Trust Agreement. Filed as exhibit 10.5(c) to
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994 (File No. 1-8491) and
incorporated herein by reference.
10.4 Form of Indemnification Agreement dated May
27, 1987,between Hecla Mining Company and each of
its Directors and Officers. Filed as exhibit
10.15 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1987 (File No. 1-
8491) and incorporated herein by reference.
10.5 Summary of Short-term Performance Payment
Plan. Filed as exhibit 10.7 to Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1994 (File No. 1-8491) and
incorporated herein by reference.
10.6(a) Amended and Restated Golden Eagle Earn-In
Agreement between Santa Fe Pacific Gold
Corporation and Hecla Mining Company dated as of
September 6, 1996. Filed as exhibit 10.11(a) to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 (File No. 1-8491)
and incorporated herein by reference.
10.6(b) Golden Eagle Operating Agreement between Santa Fe
Pacific Gold Corporation and Hecla Mining Company
dated as of September 6, 1996. Filed as exhibit
10.11(b) to Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996
(File No. 1-8491) and incorporated herein by
reference.
10.6(c) First Amendment to the Amended and Restated Golden
Eagle Earn-in Agreement effective September 5,
2002 by and between Echo Bay Mines Ltd. and Hecla
Mining Company. Filed on October 7, 2002 as
exhibit 10.6(c) to Registrant's Registration
Statement on Form S-1 (File No. 333-100395) and
incorporated herein by reference.
10.7 Limited Liability Company Agreement of the
Rosebud Mining Company, LLC among Santa Fe Pacific
Gold Corporation and Hecla Mining Company dated as
of September 6, 1996. Filed as exhibit 10.12 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 (File No. 1-8491)
and incorporated herein by reference.
55
10.8 Restated Mining Venture Agreement among
Kennecott Greens Creek Mining Company, Hecla
Mining Company and CSX Alaska Mining Inc. dated
May 6, 1994. Filed as exhibit 99.A to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994 (File No. 1-8491) and
incorporated herein by reference.
10.9 Credit Agreement dated as of June 25, 1999,
among Monarch Resources Investments Limited as
Borrower, Monarch Minera Suramericana, C.A. as an
additional obligor and Standard Bank London
Limited as Collateral and Administrative Agent.
Filed as exhibit 10.3 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1999 (File No. 1-8491) and incorporated herein by
reference.
10.10 Subordinated Loan Agreement dated as of June
25, 1999, among Hecla Mining Company as Borrower
and Standard Bank London Limited as Initial
Lender, Collateral and Administrative Agent.
Filed as exhibit 10.4 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1999 (File No. 1-8491) and incorporated herein by
reference.
10.11 Subordination Agreement dated as of June 25,
1999, among NationsBank, N.A. as Senior Creditor,
Standard Bank London Limited as Subordinated
Creditor and Hecla Mining Company. Filed as
exhibit 10.5 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999
(File No. 1-8491) and incorporated herein by
reference.
10.12 Subordinated Loan Agreement dated June 29,
2000, among Hecla Mining Company as Borrower and
Standard Bank London Limited as Lender. Filed as
exhibit 10.1 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000
(File No. 1-8491) and incorporated herein by
reference.
10.13 Subordination Agreement dated June 29, 2000,
among Hecla Mining Company and Standard Bank
London Limited as Senior Creditor and Subordinated
Creditor. Filed as exhibit 10.2 to Registrant's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000 (File No. 1-8491) and
incorporated herein by reference.
10.14 Stock Purchase Agreement dated November 17,
2000, between Hecla Mining Company and Zemex U.S.
Corporation. Filed as exhibit 10.1 to
Registrant's Current Report on Form 8-K dated
November 17, 2000 (File No. 1-8491) and
incorporated herein by reference.
56
10.15 Stock Purchase Agreement dated February 27,
2001, between Hecla Mining Company and IMERYS USA,
Inc. Filed as exhibit 99 to Registrant's Current
Report on Form 8-K dated March 27, 2001 (File No.
1-8491) and incorporated herein by reference.
10.16 Form of Retention Agreement dated July 20,
2001, between Hecla Mining Company and Arthur
Brown. (Registrant has substantially identical
agreements, with each of Messrs. Phillips S.
Baker, Jr, Thomas F. Fudge, Vicki J. Veltkamp, and
Lewis E. Walde. Filed as exhibit 10.19 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001 (File No. 1-8491) and
incorporated herein by reference.
10.17 Real Estate Purchase and Sale Agreement
between Hecla Mining Company and JDL Enterprises,
LLC dated October 19, 2001. Filed as exhibit 10.21
to Registrant's Annual Report on Form 10-K for the
year ended December 31, 2001 (File No. 1-8491) and
incorporated herein by reference.
10.18 Revolving Credit Agreement dated March 27,
2002 with IIG Capital LLC. Filed on October 7,
2002 as exhibit 10.18 to Registrant's Registration
Statement on Form S-1 (File No. 333-100395) and
incorporated herein by reference.
10.19 Earn-In Agreement dated August 2, 2002
between Hecla Ventures Corp. and Rodeo Creek.
Filed on October 7, 2002 as exhibit 10.19 to
Registrant's Registration Statement on Form S-1
(File No. 333-100395) and incorporated herein by
reference.
10.20 Lease Agreement dated September 5, 2002
between Hecla Mining Company and CVG-Minerven.
Filed on October 7, 2002 as exhibit 10.20 to
Registrant's Registration Statement on Form S-1
(File No. 333-100395) and incorporated herein by
reference.
12 Fixed Charge Coverage Ratio Calculation is attached
hereto.